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A

PROJECT REPORT

On

MUTUAL FUND ANALYSIS & TRENDS

A

PROJECT REPORT

On

MUTUAL FUND ANALYSIS & TRENDS

At

SHAREKHAN LTD.

                                             

Submitted By:

 

 

A report submitted in the partial fulfillment   of

The requirements of

POST GRADUATE DEPLOMA IN BUSINESS ADMINISTRATION Conducted By

GRADUATE SCHOOL OF BUSINESS AND ADMINISTRATION

UNDER GUIDE BY:

Internal Guide:

 

(Placement Head,GSBA)

External Guide:

 

(Assitant  Manager, Share Khan, NIODA)

ACKNOWLEDGMENT

I would like to express my sincere gratitude to ………………………. (Branch Manager, SHAREKHAN, NOIDA) for giving me the opportunity to work under his guidance.

I would also like to thank my External guide ………………….(Assistant Manager, SHAREKHAN, NOIDA) for giving me this opportunity to work upon this project.

I sincerely thank my Internal guide …………………… (Placement Head,GSBA ) , for guiding me throughout the project and helping me by furnishing the required information as and when I needed.

I would like to extend my deepest thanks to ………………. (Executive Director,GSBA) and the entire faculty member for the co-operation extended by them.

I would also like to express my profound gratitude to all others who have been instrumental in the preparation of the project report.

Above all I would like to thank God for giving me the strength.

 

CONTENTS

EXECUTIVE SUMMARY        

SYNOPSIS        

COMPANY PROFILE        

Introduction        

Services provided by the SHAREKHAN :--        

Equities and Derivatives        

Sharekhan equity analysis        

MUTUAL FUND        

Introduction        

Organisation of a Mutual Fund        

Sponsor        

Mutual Fund as Trusts        

Asset Management Company(AMC)        

History        

MUTUAL FUNDS IN INDIA        

First Phase - 1964-87        

Second Phase - 1987-1993 (Entry of Public Sector Funds)        

Third Phase - 1993-2003 (Entry of Private Sector Funds)        

Fourth Phase - since February 2003        

Advantages of Mutual Funds        

Objectives        

MORE ABOUT MUTUAL FUNDS        

What is the Regulatory Body for Mutual Funds?        

What are the benefits of investing in Mutual Funds?        

What is NAV?        

What is Entry/Exit Load?        

Are there any risks involved in investing in Mutual Funds?        

TYPES OF MUTUAL FUNDS        

Schemes By Structure        

Schemes by investment Objective        

Other Objective        

Schemes By Structure In Detail        

Schemes according to Investment Objective In Detail        

Other Schemes In Detail        

TAX BENEFITS        

To The Mutual Fund        

Tax Implications To Investors        

RISK FACTORS        

STATUTORY DETAILS        

DIFFERENT INVESTMENT PLANS THAT MUTUAL FUND OFFERS        

Growth Plan and Dividend Plan        

Dividend Reinvestment Plan        

RIGHTS AVAILABLE TO A MUTUAL FUND HOLDER IN INDIA        

FUND OFFER DOCUMENT        

ACTIVE FUND MANAGEMENT        

PASSIVE FUND MANAGEMENT        

EXCHANGE TRADE FUND (ETF)        

Latest Development In ETF (TOI Aug 12, 2006)        

SHARE KHAN MUTUAL FUNDS        

Investment Philosophy        

ASSOCIATION OF MUTUAL FUND IN INDIA (AMFI)        

The AMFI Code Of Ethics        

AMFI Mutual Fund        

Professional Selling Practice        

Enforcement        

Definitions        

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)(MUTUAL FUNDS) REGULATIONS, 1996        

Procedure for Registering a Mutual Fund with SEBI        

Terms & Conditions for Registration (Regulation: 10)        

Constitution of the Mutual Fund (Regulation: 14)        

Contents of trust deed (Regulation: 15)        

SEBI Guidelines (2001-02) Relating to Mutual Funds        

Investing in Mutual Funds        

INVESTOR’S BEHAVIOUR        

STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRY        

Some of the AMCs operating currently are        

RECENT TRENDS IN THE INDIAN MUTUAL FUND INDUSTRY        

Causal Factors For The Trend        

Growth of Business Of UTI        

Mutual fund flows -- Private sector funds in focus        

Shifting asset base        

Big share in inflows        

Healthy competition        

Beating the broader indices        

Top performing funds        

Sector funds, a mixed bag        

Focus on select sectors        

The laggards        

Sector funds lose steam        

Mid-cap focus pays off        

Tax-saving funds race ahead        

Broader indices, tough to beat        

Large-cap focus drags performance        

PROBLEMS        

MEASURES TO OVERCOME THESE PROBLEMS        

LIST OF FIGURES

Figure 1: GROWTH IN ASSETS UNDER MANAGEMENT        

Figure 2: Indian Mutual Fund Industry Organization        

Figure 3: Asset under Management        

Figure 4: Number of Schemes        

Figure 5: Asset Under Management        

BIBLIOGRAPHY

EXECUTIVE SUMMARY

Mutual fund industry has emerged as the most dynamic segment of the Indian financial system. Thanks to the rigorous policy initiatives of the government. Till 1987 the UTI was the only mutual fund. The industry has witnessed an unprecedented level of growth with the entry of mutual funds sponsored by nationalized banks and insurance companies. The objective of this project is to explain the data interpretation and Analysis of Mutual funds industry.

Description of the Project:

Take a comprehensive look at the overall performance of the MF industry in India:

  1. Comparison of Returns
  2. Investor’s Behavior
  3. Pattern of investments
  1. Performance of Private sector Funds
  2. Performance of Public sector Funds
  3. Performance of UTI Funds
  4. Problems the industry is facing and measures to overcome these      problems

                   

 SYNOPSIS

TITLE: MUTUAL FUND ANALYSIS AND TRENDS

Objective of Project:

 To make analysis of. Mutual funds and their performance

Scope:

This project will provide me the better platform to understand the history, growth & various other aspects of mutual fund. It will also help me to under stand the behavior of Indian investor regarding different investment tools. The study also encompasses the trend mutual fund industry has been following and to find out how good and safe are these as an investment option.

Research Methodology:

The research methodology has been conclusive in nature. The information has been gathered from various useful and relevant web sites,books, newspaper and magazine.

Report Submitted:

 Branch Office:

        SHARE KHAN LTD.

        P-12a, 3rd floor,

        BHS Libery,

        Sector-18,

        NOIDA (U.P.)

Head Office:-

        SHARE KHAN   LTD.

        A-206, Phoenix House,

        2nd floor, Senapati Bapat Marg,

        Lower Parel.  MUMBAI-400013

COMPANY PROFILE

Introduction

Share khan is one of the leading retail brokerage firms in the country. It is the retail broking arm of the Mumbai-based SSKI (Shripal Shivlal Kantilal Ishwarlal) Group, which has over eight decades of experience in the stock broking business. Share khan offers its customers a wide range of equity related services including trade execution on BSE, NSE, Derivatives, depository services, online trading, mutual fund, investment advice etc.

The firm's online trading and investment site—www.Sharekhan.com—was launched on Feb 8, 2000. The site gives access to superior content and transaction facility to retail customers across the country. Known for its jargon-free, investor friendly language and high quality research, the site has a registered base of over one-lakh customers. The number of trading members currently stands at over 8000. While online trading currently accounts for just over 1 per cent of the daily trading in stocks in India, Share khan alone accounts for 22 per cent of the volumes traded online .

The content-rich and research oriented portal has stood out among its contemporaries because of its steadfast dedication to offering customers best-of-breed technology and superior market information. The objective has been to let customers make informed decisions and to simplify the process of investing in stocks.

On April 17, 2002 Share khan launched Speed Trade, a net-based executable application that emulates the broker terminals along with host of other information relevant to the Day Traders. This was for the first time that a net-based trading station of this caliber was offered to the traders. In the last six months Speed Trade has become a de facto standard for the Day Trading community over the net.

Share khan’s ground network includes over 350 centers in 150 cities in India, of which 130 are fully-owned twigs.

Share khan is lead by a highly regarded management team that has invested corers of rupees into a world class Infrastructure that provides our clients with real-time service & 24/7 accesses to all information and products. Our flagship Share khan Professional Network offers real-time prices, detailed data and news, intelligent analytics, and electronic trading capabilities, right at your fingertips. This powerful technology complemented by our knowledgeable and customer focused Relationship Managers. We are creating a world of Smart Investor.

Share khan offers a full range of financial services and products ranging from Equities to Derivatives enhance your wealth and hence, achieve your financial goals

Share khan has always believed in investing in technology to build its business. The company has used some of the best-known names in the IT industry, like Sun Microsystems, Oracle, Microsoft, Cambridge Technologies, Nexgenix, Vignette, Verisign Financial Technologies India Ltd, Spider Software Pvt. Ltd. to build its trading engine and content.  The Morakhia family holds a majority stake in the company. HSBC, Intel & Carlyle are the other investors.

With a legacy of more than 80 years in the stock markets, the SSKI group ventured into institutional broking and corporate finance 18 years ago. Presently SSKI is one of the leading players in institutional broking and corporate finance activities. SSKI holds a sizable portion of the market in each of these segments. SSKI's institutional broking arm accounts for 7% of the market for Foreign Institutional portfolio investment and 5% of all Domestic Institutional portfolio investment in the country. It has 60 institutional clients spread over India, Far East, UK and US. Foreign Institutional Investors generate about 65% of the organization's revenue, with a daily turnover of over US$ 2 million. The Corporate Finance section has a list of very prestigious clients and has many 'firsts' to its credit, in terms of the size of deal, sector tapped etc. The group has placed over US$ 1 billion in private equity deals. Some of the clients include BPL Cellular Holding, Gujarat Pipavav, Essar, Hutchison, Planetasia, and Shopper's Stop.

 
 
Services provided by the SHAREKHAN :-- 

Equities and Derivatives

 
Our Retail Equity Business caters to the needs of individual Indian and Non-Resident Indian (NRI) investors. Share khan offers broker assisted trade execution, automated online investing and access to all IPO's.


Through various types of brokerage accounts, India bulls offers the purchase and sale of securities which includes Equity, Derivatives and Commodities Instruments listed on National Stock Exchange of India Ltd (NSEIL), The Stock Exchange, Mumbai (BSE) and NCDEX.


Choose the service options that fit you best.

 

 
Sharekhan equity analysis 

 
Building and maintaining your ideal portfolio demands objective, dependable information. Share khan Equity Analysis helps satisfy that need by rating stocks based on carefully selected, fact-based measures. And because we're not focused on investment banking, we don't have the same conflicts of interest as traditional brokerage firms. This objectivity is only one important difference in our ratings

  

 
 
 
 
 

MUTUAL FUND

Introduction

 A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an invest-able surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

Organisation of a Mutual Fund

There  are  many  entities  involved  and  the  diagram  below  illustrates  the  organisational set up of a mutual fund:

Three Key players namely Sponsor, AMC, and Mutual Fund Trust are involved in setting up a Mutual Fund.

Sponsor

Sponser is any person who acting alone or with another body corporate establishes a mutual fund. The sponsor of a fund is akin to the promoter of a company as he gets the fund registered with SEBI.

Mutual Fund as Trusts

A Mutual Fund in India is constituted in the form of a public Trust created under the Indian Trusts Act, 1882. The sponsor forms the trust and registers it with SEBI. The fund sponsor acts as the settler of the Trust, contributing to its initial capital and appoints a trustee to hold the assets of the trust for the benefit of the unit-holders, who are the beneficiaries of the Trust. The fund then invites investors to contribute their money in the common pool, by subscribing to ‘units’ issued by various schemes established by the Trust as evidence of their beneficial interest in the fund.

Asset Management Company(AMC)

An AMC is a firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives. For a fee, the investment company provides more diversification, liquidity, and professional management service than is normally available to individual investors.

Custodian

A custodian handles the investment back office of a mutual fund. Its responsibility includes  receipt and delivery of securities, collection of income, distribution of income and segregation of asset between schems. The sponsor of a mutual fund can not act as a custodian to the fund.

History

In 1774 a Dutch merchant invited subscriptions from investors to set up an investment trust by the name of Eendragt Maakt Magt (Unity Creates Strength), with the objective of providing diversification at low cost to the investors. Its success caught on, and more investment trust were launched with verbose and quirky names that, when translated, read, ‘Profitable and Prudent’ or ‘small Matters Grow By Consent’. The foreign and Colonial Government Trust, formed in London in 1868, promised “the investor of modest means the same advantage as the large capitalist….by spreading the investment over a number of stocks”.

Mutual funds are not an American invention. The first was started in the Netherlands in 1822, and the second in Scotland in the 1880's.

Originally called investment trusts, the first American one was the New York Stock Trust, established in 1889. Most that followed were begun in Boston in the early 1920's, including the State Street Fund, Massachusetts Investor's Trust (now called MFS), Fidelity, Scudder, Pioneer, and the Putnum Fund. The Wellington Fund, the first balanced fund that included both stocks and bonds, was founded in 1928, and today is part of the giant Vanguard Funds Group.

In the 1960's there was a phenomenal rise in aggressive growth funds (with very high risk). Sometimes called "go-go" or "hot-shot" funds, they received the majority of the billions of dollars flowing into mutual funds at that time. In 1968 and 1969, over 100 of these new aggressive growth funds were established.

A severe bear market began in the autumn of 1969. People became disillusioned with stocks and mutual funds. "The market's toast. it'll never get back to where it was!" was echoed by panicked investors.

Unemployment grew, inflation went crazy, and investors pulled billions back out of the funds. They should have hung in there! Many funds have risen 9,000% since then.

The 1970's saw a new kind of fund innovation: funds with no sales commission called "no load" funds. The largest and most successful no load family of funds is the Vanguard Funds, created by John Bogle in 1977.

At the end of the 1920's there were only 10 mutual funds. At the end of the 1960's there were 244. Today there are more than 6,500 unique funds and even thousands more that differ only by their share class (how they are sold, and how their expenses are charged).

Before we continue with all you need to know about mutual funds, here is something that merits your attention. Since 1940, no mutual fund has gone bankrupt. You sure can't say that about banks and savings and loans!

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases:

MUTUAL FUNDS IN INDIA

                                

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December,1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase - since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. At present there are over 1000 schemes floated by these 29 funds.


Mutual Fund Industry

Figure 1: GROWTH IN ASSETS UNDER MANAGEMENT

The Indian Timeline

YEAR

EVENT

1963

UTI is India’s first mutual fund

1964

UTI launches US-64

1971

UTI’s ULIP(Unit Linked Insurance Plan) is second scheme to be launched

1986

UTI Mastershare, India’s first true ‘mutual fund’ scheme launched

1987

PSU banks and insurers allowd to float mutual funds:State Bank OF India (SBI) first off the blocks

1992

The Harshad Mehta-fulled Bbull market arouses middle-class intrest in shares and mutual fund

1993

Private sector and foreign players allowd;Kothari Pioneer first private fund house to start operations;SEBI set up to regulate

1994

Morgan Stanley is the first foreign player

1996

SEBI’s mutual fund rules and regulations,come into force

1998

UTI Master Index Fund is the country’s first index fund

1999

The take over of 20th Century AMC by Zurich Mutual Fund is the first acquisition in mutual fund industry

2000

The industry’s asset under management crosses Rs 100,000 crore

2001

US-64 scam leads to UTI overhaul

2002

UTI bifurcated,comes under SEBI perview;

2003

AMFI certification made compulsory for new agents

Advantages of Mutual Funds

The advantages of investing in a Mutual Fund are:

Objectives

1. To define and maintain high professional and ethical standards in all areas of operation of mutual fund industry

2. To recommend and promote best business practices and code of conduct to be followed by members and others engaged in the activities of mutual fund and asset management including agencies connected or involved in the field of capital markets and financial services.
 

3. To interact with the Securities and Exchange Board of India (SEBI) and to report to SEBI on all matters concerning the mutual fund industry.
 

4. To report to the Government, Reserve Bank of India and other bodies on all matters relating to the Mutual Fund Industry.
 

5. To develop a cadre of well trained Agent distributors and to implement a programmer of training and certification for all intermediaries and other engaged in the industry.
 

6. To undertake nation wide investor awareness program so as to promote proper understanding of the concept and working of mutual funds.
 

7. To disseminate information on Mutual Fund Industry and to undertake studies and research directly and/or in association with other bodies.

MORE ABOUT MUTUAL FUNDS

What is the Regulatory Body for Mutual Funds?

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the mutual funds must get registered with SEBI.

What are the benefits of investing in Mutual Funds?

There are several benefits from investing in a Mutual Fund:

Small investments: Mutual funds help you to reap the benefit of

returns by a portfolio spread across a wide spectrum of companies

with small investments.

Professional Fund Management: Professionals having

considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyse the

markets and economy to pick good investment opportunities.

Spreading Risk: An investor with limited funds might be able to

invest in only one or two stocks/bonds, thus increasing his or her

risk. However, a mutual fund will spread its risk by investing a

number of sound stocks or bonds. A fund normally invests in

companies across a wide range of industries, so the risk is diversified.

Transparency: Mutual Funds regularly provide investors with

information on the value of their investments. Mutual Funds also

provide complete portfolio disclosure of the investments made by

various schemes and also the proportion invested in each asset type.

Choice: The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk/ return profile.

Regulations: All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests

 of the investor.

What is NAV?

NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAV-related prices.

The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end scheme should be disclosed on a daily basis and the NAV of a close end scheme should be disclosed at least on a weekly basis.

What is Entry/Exit Load?

A Load is a charge, which the mutual fund may collect on entry and/or exit from a fund. A load is levied to cover the up-front cost incurred by the mutual fund for selling the fund. It also covers one time processing costs.        Some funds do not charge any entry or exit load. These funds are referred to as ‘No Load Fund’. Funds usually charge an entry load ranging between1.00% and 2.00%.

Exit loads vary between 0.25% and 2.00%.For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the entry load levied is 1.00%, the price at which the investorinvests is Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units. (Note that units are allotted to an investor based on the amount invested and not on the basis of no. of units purchased).

Let us now assume that the same investor decides to redeem his 761.6146 units. Let us also assume that the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption price per unit works out to Rs. 14.925. The investor therefore receives 761.6146 x 14.925 = Rs.11367.10.

Are there any risks involved in investing in Mutual Funds?

Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures, bonds etc. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and if a company defaults in payment of interest/principal on their debentures/bonds the performance of the fund may get affected. Besides incase there is a sudden downturn in an industry or the government comes up with new a regulation which affects a particular industry or company the fund can again be adversely affected. All these factors influence the performance of Mutual Funds. Some of the Risk to which Mutual Funds are exposed to is given below:

Market risk

If the overall stock or bond markets fall on account of overall

economic factors, the value of stock or bond holdings in the fund's

portfolio can drop, thereby impacting the fund performance.

Non-market risk

Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries.

Interest rate risk

Bond prices and interest rates move in opposite directions. When

interest rates rise, bond prices fall and this decline in underlying

securities affects the fund negatively.

Credit risk

Bonds are debt obligations. So when the funds invest in corporate

bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a beating.

TYPES OF MUTUAL FUNDS

Schemes By Structure

Schemes by investment Objective

Other Objective

Schemes By Structure In Detail

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period

a. Open-ended Fund/ Scheme

        An open-ended fund or scheme is one that is available for subscription         and repurchase on a continuous basis. These schemes do not have a         fixed maturity period. Investors can conveniently buy and sell units at Net         Asset Value (NAV) related prices which are declared on a daily basis. The         key feature of open-end schemes is liquidity.

b. Close-ended Fund/ Scheme

        A close-ended fund or scheme has a stipulated maturity period e.g. 5-7         years. The fund is open for subscription only during a specified period at         the time of launch of the scheme. Investors can invest in the scheme at         the time of the initial public issue and thereafter they can buy or sell the         units of the scheme on the stock exchanges where the units are listed. In         order to provide an exit route to the investors, some close-ended funds         give an option of selling back the units to the mutual fund through periodic         repurchase at NAV related prices. SEBI Regulations stipulate that at least         one of the two exit routes is provided to the investor i.e. either repurchase         facility or through listing on stock exchanges. These mutual funds         schemes disclose NAV generally on weekly basis.

Schemes according to Investment Objective In Detail

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:

                a. Growth / Equity Oriented Scheme

                The aim of growth funds is to provide capital appreciation over the                                 medium to long- term. Such schemes normally invest a major part of their                         corpus in equities. Such funds have comparatively high risks. These

                schemes provide different options to the investors like dividend option,

                capital appreciation, etc. and the investors may choose an option

                depending on their preferences. The investors must indicate the option in

                the application form. The mutual funds also allow the investors to change

                the options at a later date. Growth schemes are good for investors having

                a long-term outlook seeking appreciation over a period of time.

b. Income / Debt Oriented Scheme

        The aim of income funds is to provide regular and steady income to         investors. Such schemes generally invest in fixed income securities such         as bonds, corporate debentures, Government securities and money         market instruments. Such funds are less risky compared to equity         schemes. These funds are not affected because of fluctuations in equity         markets. However, opportunities of capital appreciation are also limited in         such funds. The NAVs of such funds are affected because of change in         interest rates in the country. If the interest rates fall, NAVs of such funds         are likely to increase in the short run and vice versa. However, long term         investors may not bother about these fluctuations.

c. Balanced Scheme

        The aim of balanced funds is to provide both growth and regular income         as such schemes invest both in equities and fixed income securities in the         proportion indicated in their offer documents. These are appropriate for         investors looking for moderate growth. They generally invest 40-60% in         equity and debt instruments. These funds are also affected because of         fluctuations in share prices in the stock markets. However, NAVs of such         funds are likely to be less volatile compared to pure equity funds.

        d. Money Market or Liquid Fund Schemes

        These funds are also income funds and their aim is to provide easy         liquidity, preservation of capital and moderate income. These schemes         invest exclusively in safer short-term instruments such as treasury bills,         certificates of deposit, commercial paper and inter-bank call money,         government securities, etc. Returns on these schemes fluctuate much less         compared to other funds. These funds are appropriate for corporate and         individual investors as a means to park their surplus funds for short         periods.

Other Schemes In Detail

        a. Gilt Funds

        These funds invest exclusively in government securities. Government         securities have no default risk. NAVs of these schemes also fluctuate due         to change in interest rates and other economic factors as is the case with         income or debt oriented schemes.

        b. Index Funds

        Index Funds replicate the portfolio of a particular index such as the BSE         Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in         the securities in the same weightage comprising of an index. NAVs of         such schemes would rise or fall in accordance with the rise or fall in the         index, though not exactly by the same percentage due to some factors         known as "tracking error" in technical terms. Necessary disclosures in this         regard are made in the offer document of the mutual fund scheme.
        There are also exchange traded index funds launched by the mutual funds         which are traded on the stock exchanges.

        c. Load And No-load Fund

        A Load Fund is one that charges a percentage of NAV for entry or exit.         That is, each time one buys or sells units in the fund, a charge will be         payable. This charge is used by the mutual fund for marketing and         distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as         well as exit load charged is 1%, then the investors who buy would be         required to pay Rs.10.10 and those who offer their units for repurchase to         the mutual fund will get only Rs.9.90 per unit. The investors should take         the loads into consideration while making investment as these affect their         yields/returns. However, the investors should also consider the         performance track record and service standards of the mutual fund which         are more important. Efficient funds may give higher returns in spite of         loads.


        A no-load fund is one that does not charge for entry or exit. It means the         investors can enter the fund/scheme at NAV and no additional charges         are payable on purchase or sale of units.

        d. Tax Saving Schemes

        These schemes offer tax rebates to the investors under specific provisions         of the Income Tax Act, 1961 as the Government offers tax incentives for         investment in specified avenues. e.g. Equity Linked Savings Schemes         (ELSS). Pension schemes launched by the mutual funds also offer tax         benefits. These schemes are growth oriented and invest pre-dominantly in         equities. Their growth opportunities and risks associated are like any         equity-oriented scheme.

TAX BENEFITS

As per the taxation laws in force as at the date of updating this document, the tax benefits that are available to the investors investing in the Units of the Scheme(s) are stated herein below.
The tax benefits described in this Document are as available under the present taxation laws and are available subject to relevant conditions. The information given is included only for general purpose and is based on advice received by the AMC regarding the law and practice currently in force in India and the Investors/Investors should be aware that the relevant fiscal rules or their interpretation may change. As is the case with any investment, there can be no guarantee that the tax position or the proposed tax position prevailing at the time of an investment in the Scheme will endure indefinitely. In view of the individual nature of tax consequences, each Investor is advised to consult his/ her own professional tax advisor.

To The Mutual Fund

The entire income of the Mutual Fund will be exempt from Income Tax in accordance with the provisions of Section 10(23D) of the Income Tax Act, 1961.

The Mutual Fund will receive all income without any deduction of tax at source under the provisions of Section 196(iv), of the Act. However, on income distribution, if any, made by the Mutual Fund, income-tax will be payable under Section 115R of the Act, at 12.5% (plus surcharge as applicable from time to time) on the dividends declared under the schemes on or after April 1, 2003

However, these provisions will not be applicable to any income distributed by an open-ended equity oriented fund (where more than 50 percent of total proceeds of the mutual fund are invested in equity shares of domestic companies as defined in Section 115T of the Act) for a period of one year commencing from April 1, 2003.

Tax Implications To Investors

The following summary outlines the tax implications applicable to resident Investors of the Schemes and is based on relevant provisions under the Act, 1961, Wealth-tax Act, 1957 and Gift Tax Act, 1958 (collectively called 'the relevant provisions'), consequent upon the amendments enacted by the Finance Act 2003:

Income other than Capital Gains

As per the provisions of Section 10(35) of the Act, income received in respect of units of a mutual fund specified under Section 10(23D) of the Act is exempt from income tax in the hands of the recipient Investors.


Tax Deduction at Source
In view of the exemption of income in the hands of the Investors, no income tax is deductible at source, on income distribution by the Mutual Fund, under the provisions of sections 194K of the Act.

Capital Gains

As per section 2(42A) of the act, units of the scheme held as a capital asset, for a period of more than 12 months immediately preceding the date of transfer, will be treated as a long-term capital asset for the computation of capital gains; in all other cases, it would be treated as a short-term capital asset.
Also, sub-section (7) of section 94 of the act provides that loss, if any, arising from the sale/transfer of units (including redemption) purchased up to 3 months prior to the record

RISK FACTORS

Mutual Funds and securities investments are subject to market risks and there can be no assurance or guarantee that the Schemes objectives will be achieved. As with any investment in securities, the Net Asset Value of Units issued under the Schemes may go up or down depending on the various factors and forces affecting the capital market. Past performance of the Sponsors/ AMC/ Mutual Fund/ Schemes and its affiliates do not indicate the future performance of the Schemes of the Mutual Fund. The Sponsors are not responsible or liable for any loss or shortfall resulting from the operations of the Schemes beyond their contribution of Rs.10,000/- each made by them towards setting of the Mutual Fund The Names of the Schemes do not in any manner indicate either the quality of the Schemes or their future prospects and returns. Investors in the Schemes are not being offered any guarantee / assured returns. Please read the Offer Documents carefully before investing.

STATUTORY DETAILS

In terms of The Unit Trust of India (Transfer of Undertaking and Repeal) Act 2002 (“Act”), the assets and liabilities of the erstwhile Unit Trust of India have been bifurcated into two parts the specified undertaking and the specified company. The Administrator of the Specified Undertaking of The Unit Trust of India comprises of US 64 and the assured return schemes (most of which have since been converted into tax free bonds, the present investment is guaranteed by the Govt. of India) . The Specified Company has been set up as a mutual fund viz. UTI MF, comprising of all net asset value based schemes. UTI MF has been structured in accordance with SEBI (Mutual Funds) Regulations, 1996 The mutual fund was registered with SEBI on January 14, 2003 under Registration Code MF/048/03/01.

DIFFERENT INVESTMENT PLANS THAT MUTUAL FUND OFFERS

The term ’investment plans’ generally refers to the services that the funds provide to investors offering different ways to invest or reinvest. The different investment plans are an important consideration in the investment decision, because they determine the flexibility available to the investor. Some of the investment plans offered by mutual funds in India are:

Growth Plan and Dividend Plan

A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions, if any, are made. The investor thus only realizes capital appreciation on the investment. Under the dividend plan, income is distributed from time to time. This plan is ideal to those investors requiring regular income.

Dividend Reinvestment Plan

Dividend plans of schemes carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested in the scheme on behalf of the investor, thus increasing the number of units held by the investors.

RIGHTS AVAILABLE TO A MUTUAL FUND HOLDER IN INDIA

As per SEBI Regulations on Mutual Funds, an investor is entitled to:

1.         Receive Unit certificates or statements of accounts confirming your title within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund.

2.         Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme.

3.         Receive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase.

4.         The trustees shall be bound to make such disclosures to the unit holders as are essential in order to keep them informed about any information, which may have an adverse bearing on their  investments.

5.         75% of the unit holders with the prior approval of SEBI can terminate the AMC of the fund.

6.         75% of the unit holders can pass a resolution to wind-up the scheme.

7.         An investor can send complaints to SEBI, who will take up the matter with the concerned Mutual Funds and follow up with them till they are resolved.

FUND OFFER DOCUMENT

A Fund Offer document is a document that offers you all the information you could possibly need about a particular scheme and the fund launching that scheme. That way, before you put in your money, you're well aware of the risks etc involved. This has to be designed in accordance with the guidelines stipulated by SEBI and the prospectus must disclose details about:

ACTIVE FUND MANAGEMENT

When investment decisions of the fund are at the discretion of a fund manager(s) and he or she decides which company, instrument or class of assets the fund should invest in based on research, analysis, market news etc. such a fund is called as an actively managed fund. The fund buys and sells securities actively based on changed perceptions of investment from time to time. Based on the classifications of shares with different characteristics, ‘active’ investment managers construct different portfolio. Two basic investment styles prevalent among the mutual funds are Growth Investing and Value Investing:

Growth Investing Style

The primary objective of equity investment is to obtain capital appreciation. A growth manager looks for companies that are expected to give above average earnings growth, where the manager feels that the earning prospects and therefore the stock prices in future will be even higher. Identifying such growth sectors is the challenge before the growth investment manager.

Value investment Style

A Value Manager looks to buy companies that they believe are currently undervalued in the market, but whose worth they estimate will be recognized in the market valuations eventually.

PASSIVE FUND MANAGEMENT

When an investor invests in an actively managed mutual fund, he or she

leaves the decision of investing to the fund manager. The fund manager is the decision- maker as to which company or instrument to invest in.

Sometimes such decisions may be right, rewarding the investor handsomely. However, chances are that the decisions might go wrong or may not be right all the time which can lead to substantial losses for the investor. There are mutual funds that offer Index funds whose objective is to equal the return given by a select market index. Such funds follow a passive investment style. They do not analyse companies, markets, economic factors and then narrow down on stocks to invest in. Instead they prefer to invest in a portfolio of stocks that reflect a market index, such as the Nifty index. The returns generated by the index are the returns given by the fund. No attempt is made to try and beat the index. Research has shown that most fund managers are unable to constantly beat the market index year after year. Also it is not possible to identify which fund will beat the market index.

Therefore, there is an element of going wrong in selecting a fund to invest in. This has lead to a huge interest in passively managed funds such as Index Funds where the choice of investments is not left to the discretion of the fund manager. Index Funds hold a diversified basket of securities which represents the index while at the same time since there is not much active turnover of the portfolio the cost of managing the fund also remains low.

This gives a dual advantage to the investor of having a diversified portfolio while at the same time having low expenses in fund. There are various passively managed funds in India today some of them are:

EXCHANGE TRADE FUND (ETF)

Think of an exchange-traded fund as a mutual fund that trades like a stock. Just like an index fund, an ETF represents a basket of stocks that reflect an index such as the Nifty. An ETF, however, isn't a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, an ETF's price changes throughout the day, fluctuating with supply and demand. It is important to remember that while ETFs attempt to replicate the return on indexes, there is no guarantee that they will do so exactly.

By owning an ETF, you get the diversification of an index fund plus the flexibility of a stock. Because, ETFs trade like stocks, you can short sell them, buy them on margin and purchase as little as one share. Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on any regular trade. There are various ETFs available in India, such as:

NIFTY BeES:

An Exchange Traded Fund launched by Benchmark Mutual        Fund in January 2002.

Junior BeES:

An Exchange Traded Fund on CNX Nifty Junior, launched by Benchmark Mutual Fund in February 2003.

SUNDER:

An Exchange Traded Fund launched by UTI in July 2003.

Liquid BeES:

An Exchange Traded Fund launched by Benchmark Mutual Fund in July 2003.

Bank BeES:

An Exchange Traded Fund (ETF) launched by Benchmark Mutual Fund in May 2004.

        

Latest Development In ETF (TOI Aug 12, 2006)

An amendment  to the SEBI Mutual Fund regulation has hiked the annual fees, that asset managers pay  SEBI, by at least four times. A separate circular has put different standards for funds that invest in securities as opposed to ETFs, abroad.

The circular listing guidelines for mutual fund investing abroad says that a fund has to have experience of at least 10 years as on December 31, 2006 to be eligible to invest in Exchange Traded Funds (ETFs) which requires a relatively passive investment strategy. The mutual fund or its sponsors have to be experienced in foreign securities and they have to disclose the nature of experience in the offer document. The trustees of the fund have to certify the experience.

However the eligibility criteria does not apply to funds investing in ADRs and GDRs, equity or debt of foreign companies

Intention to invest on foreign securities / ETFs  shall be disclosed in the offer document of the schemes. The attendant risk factor and returns ensuing from such investment shall be explained.

SEBI has decided  to hike its annual fees (called service fees until now) from Rs 25000 to 0.3% of the money collected in new fund offers or a minimum of Rs 1 lakh. If  the fund collects, say Rs 1000 crore from investors in offer, it will have to pay  a total of Rs 30 lakh to SEBI.

SHARE KHAN MUTUAL FUNDS

Investment Philosophy

SHARE KHAN Mutual Fund’s investment philosophy is to deliver consistent and stable returns in the medium to long term with a fairly lower volatility of fund returns compared to the broad market. It believes in having a balanced and well-diversified portfolio for all the funds and a rigorous in-house research based approach to all its investments. It is committed to adopt and maintain good fund management practices and a process based investment management.

SHARE KHAN Mutual Fund follows an investment approach of giving as equal an importance to asset allocation and sectoral allocation, as is given to security selection while managing any fund. It combines top-down and bottom-up approaches to enable the portfolios/funds to adapt to different market conditions so as to prevent missing an investment opportunity.

In terms of its funds performance, SHARE KHAN Mutual Fund aims to consistently remain in the top quartile vis-à-vis the funds in the peer group.

ASSOCIATION OF MUTUAL FUND IN INDIA (AMFI)

The AMFI Code Of Ethics

One of the objects of the Association of Mutual Funds in India (AMFI) is to promote the investors’ interest by defining and maintaining high ethical and professional standards in the mutual fund industry. In pursuance of this objective, AMFI had constituted a Committee under the Chairmanship of Shri A. P. Pradhan with Shri S. V. Joshi, Shri C. G. Parekh and Shri M. Laxman Kumar as members. This Committee, working in close co-operation with Price Waterhouse–LLP under the FIRE Project of USAID, has drafted the Code, which has been approved and recommended by the Board of AMFI for implementation by its members. I take opportunity to thank all of them for their efforts.

The AMFI Code of Ethics, “The ACE” for short, sets out the standards of

good practices to be followed by the Asset Management Companies in their operations and in their dealings with investors, intermediaries and the public. SEBI (Mutual Funds) Regulation 1996 requires all Asset Management Companies and Trustees to abide by the Code of conduct as specified in the Fifth Schedule to the Regulation. The AMFI Code has been drawn up to supplement that schedule, to encourage standards higher than those prescribed by the Regulations for the benefit of investors in the mutual fund industry.

This is the first edition of the Code and it may be supplemented further as may be necessary. I hope members of AMFI would implement the code and ensure that their employees are made fully aware of the Code.

                                                                           

Registered Office :

1218, B- Wing, Dalamal Tower,

Free Press Journal Marg, Nariman Point,

Mumbai – 400 021. Tel : 5632 4524 / 5632 4525 Fax : 2283 1163.

AMFI Mutual Fund

Integrity

Due Diligence

Disclosures

Professional Selling Practice

Investment Practice

Operations

Reporting Practice

Unfair Competition

Observance Of Statutes, Rules And Regulations

Enforcement

Members shall:

Definitions

When used in this code, unless the context otherwise requires

(a)         AMFI

“AMFI” means the Association of Mutual Funds in India

(b)         Associate

“Associate” means and includes an ‘associate’ as defined in regulation 2(c) of SEBI (Mutual Fund) Regulations 1996.

(c)        Fundamental investment policies

The “fundamental investment policies” of a scheme managed by a member means the investment objectives, policies, and terms of the scheme, that are considered fundamental attributes of the scheme and on the basis of which unitholders have invested        in the scheme.

(d)        Member

A “member” means the member of the Association of Mutual Funds in India.

(e)         SEBI

“SEBI” means Securities and Exchange Board of India.

(f)         Significant Unit holder

A “Significant Unit holder” means any entity holding 5% or more of the total corpus of any scheme managed by the member and includes all entities directly or indirectly controlled by such a unit holder.

(g)         Trustee

A “trustee” means a member of the Board of Trustees or a director of the Trustee Company.

(h)         Trustee Company

A “Trustee Company” is a company incorporated as a Trustee Company and setup for the purpose of managing a mutual fund.

ACCOUNT STATEMENT:


A document issued by the mutual fund, giving details of transactions and holdings of an investor.

ADJUSTED NAV (TOTAL RETURN)


The net asset value of a unit assuming reinvestment of distributions made to the investors in any form.

ADVISOR


Your financial consultant who gives professional advice on the fund's investments and who supervise the management of its assets.

AGE OF FUND

The time elapsed since the launch of the fund.

ANNUAL RETURN


The percentage of change in net asset value over a year's time, assuming reinvestment of distribution such as dividend payment and bonuses.

ARBITRAGE


The practice of buying and selling an interlisted stock on different exchanges in order to profit from minute differences in price between the two markets.

BALANCE SHEET


A financial statement showing the nature and amount of a company's assets, liabilities and shareholders' equity.

BALANCED FUND


A mutual fund that maintains a balanced portfolio, generally 40% bonds and 60% equity.

BALANCE MATURITY TENURE OF A SCHEME


In the case of close-ended schemes, the balance period till the redemption of the scheme.

BLUE CHIP


A share in a large, safe, prestigious company, of the highest class among stock market investments. A blue-chip company would be called thus by being well-known, having a large paid-up capital, a good track record of dividend payments and skilled management.

CAPITAL MARKET


The market where capital funds, debt (bonds) and equity ( stocks) are traded.

INTERNATIONAL FUNDS / EMERGING MARKET FUNDS 

Funds investing in assets or bonds/shares of companies from emerging economies. These are not permissible in India due to regulations against investing abroad. Most of the schemes of Foreign Institutional Investors (FII's) investing in India are funds of this type.

MUTUAL FUND


An investment that pools shareholders money and invests it toward a specified goal. The funds are invested by a professional investment manager usually called the AMC ( Asset Management Company).

MUTUAL FUND REGULATIONS


Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 as amended up to date and such other Regulations, as may be in force from time to time, to regulate the activities of the Mutual Fund.

PORTFOLIO


The list of securities owned by the mutual fund. This list may be long, for example, Fidelity Magellan, with over 2000 stocks, or relatively short, for example, Sequoia, with only 16 stocks.

PRIMARY MARKET(NEW ISSUE MARKET)


The market on which newly issued securities are sold, including government security auctions and underwriting purchases of blocks of new issues, which are then resold.

SECONDARY MARKET


The market where the securities are traded i.e. purchased or sold after they have been initially offered to the public through a public offer in the primary market.

SECURITY


Generally, an instrument evidencing debt of or equity in a common enterprise in which a person invests on the expectation of financial gain. The term includes notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable evidences of indebtedness or ownership.


SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)(MUTUAL FUNDS) REGULATIONS, 1996

The fast growing industry is regulated by the Securities and Exchange Board of India (SEBI) since inception of SEBI as a statutory body. SEBI initially formulated "SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) REGULATIONS, 1993" Providing detailed procedure for establishment, registration, constitution, management of Trustees, Asset Management Company, about schemes/products to be designed, about investment of funds collected, general obligation of MFs, about Inspection, audit etc. Based on experience gained and feedback received from the market SEBI revised the guidelines of 1993 and issued fresh Guidelines in 1996 titled "SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) REGULATIONS, 1996". The said regulation as amended from time to time is in force even today. The salient features of these Regulatory measures are discussed in subsequent articles.

The SEBI Mutual Fund Regulations contain ten chapters and twelve schedules. Chapters containing material subjects relating to regulation and conduct of business by Mutual Funds (i.e. chapters II to VII are discussed in the subsequent pages. Chapter I relates to definition of legal terms and other preliminary matters. Chapter VIII relates to powers of SEBI for inspection and audit of Mutual Funds, while Chapter IX deals with "Offences & Penalties"(Procedure for Action In Case of Default). Chapter X deals with Miscellaneous Issues like "Saving" & "Repeal" clauses etc. You may visit SEBI website and access the original Regulations in case of need. The Table of Contents of the Regulations are given here under:

Chapter I: Preliminary
Chapter II: Registration of Mutual Fund
Chapter III: Constitution and Management of Mutual Fund and Operation of Trustees, Etc
Chapter IV: Constitution and Management of Asset Management Company and Custodian
Chapter V: Schemes of Mutual Fund
Chapter VI: Investment Objectives and Valuation Policies
Chapter VII: General Obligations
Chapter VIII: Inspection and Audit
Chapter IX: Procedure for Action In Case of Default
Chapter X: Miscellaneous
Schedule I: Forms
Form A - Application for the Grant of Registration of Mutual Fund
Form B - Certificate of Registration
Form C - Trusteeship of The Mutual Fund
Form D - Asset Management Company
Schedule II: Fees
Schedule III: Contents of The Trust Deed
Schedule IV: Contents of The Investment Agreement
Schedule V: Code of Conduct
Schedule VI: Advertisement Code
Schedule VII: Restrictions on Investments
Schedule VIII: Investment Valuation Norms
Schedule IX: Accounting Policies and Standards
Schedule X: Initial Issue Expenses
Schedule XI: Annual Report
Schedule XII: Half Yearly Financial Results

Procedure for Registering a Mutual Fund with SEBI

(Chapter: 2 of SEBI Regulations 1996)

An applicant proposing to sponsor a mutual fund in India must submit an application in Form A along with a fee of Rs.25,000. The application is examined and once the sponsor satisfies the prescribed eligibility criteria the registration certificate is issued subject to the payment of registration fees of Rs.25.00 lacks.

Eligibility Criteria for Registration (Regulation: 7)

For the purpose of grant of a certificate of registration, the applicant has to fulfill the following, namely:-

a.        The sponsor should have a sound track record and general reputation of fairness and integrity in all his business transactions;

Explanation: For the purposes of this clause "sound track record" shall mean the sponsor should,-

i.        be carrying on business in financial services for a period of not less than five years; and

ii.        The net-worth is positive in all the immediately preceding five years; and

iii.        The net-worth in the immediately preceding year is more than the capital contribution of the sponsor in the asset management company; and

iv.        The sponsor has profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year.

(The applicant is a fit and proper person]

b.        In the case of an existing mutual fund, such fund is in the form of a trust and the Board has approved the trust deed;

c.        The sponsor has contributed or contributes at least 40% to the net worth of the asset management company;

Provided that any person who holds 40% or more of the net worth of an asset management company shall be deemed to be a sponsor and will be required to fulfill the eligibility criteria specified in these regulations;

d.        The sponsor or any of its directors or the principal officer to be employed by the mutual fund should not have been guilty of fraud or has not been convicted of an offense involving moral turpitude or has not been found guilty of any economic offence;

e.        Appointment of trustees to act as trustees for the mutual fund in accordance with the provisions of the regulations;

 

f.        Appointment of asset Management Company to manage the mutual fund and operate the scheme of such funds in accordance with the provisions of these regulations;

 

g.        Appointment of a custodian in order to keep custody of the securities and carry out the custodian activities as may be authorized by the trustees.

Terms & Conditions for Registration (Regulation: 10)

The registration granted to a mutual fund under regulation 9, shall be subject to the following terms and conditions: -

a.        The trustees, the sponsor, the asset management company and the custodian shall comply with the provisions of these regulations;

b.        The mutual fund shall forthwith inform the Board, if any information or particulars previously submitted to the Board was misleading or false in any material respect;

c.        The mutual fund shall forthwith inform the Board, of any material change in the information or particulars previously furnished, which have a bearing on the registration granted by it;

d.        Payment of fees as specified in the regulations and the Second Schedule. (Rs.25 Lacks)

Constitution of the Mutual Fund (Regulation: 14)

A mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908) executed by the sponsor in favors of the trustees named in such an instrument.

Contents of trust deed (Regulation: 15)

1.        The trust deed shall contain such clauses as are mentioned in the Third Schedule and such other clauses, which are necessary for safeguarding the interests of the unit holders.

2.        No trust deed shall contain a clause, which has the effect of-

i.        Limiting or extinguishing the obligations and liabilities of the trust in relation to any mutual fund or the unit holders; or

ii.        Indemnifying the trustees or the asset management company for loss or damage caused to the unit holders by their acts of negligence or acts of commissions or omissions.

Qualification prescribed for selection of persons as Trustees, Duties/obligations of Trustees and Code of Conduct prescribed are discussed in the next article

SEBI Guidelines (2001-02) Relating to Mutual Funds

a.        bring uniformaty in disclosures of various categories of advertisements , with a  view to ensuring consistency and comparability across schemes of various mutual funds.

b.        Reduce initial offer period from a maximum of 45 days to 30 days.

c.        Dispatch statements of account once the minimum subscription amount specified in the offer document is received even before the closure of the issue.

d.        Invest in mortgaged back securities of investment grade given by credit rating agency.

e.        Identify and make provisions for the non-performing assets (NPAs) according to criteria for classification of NPAs and treatment of income accrued on NPAs in half-yearly portfolio reports.

f.        Disclose information in a revised format on Unit Capital, reserves, performance in terms of half-year period, annualized yields over the last 1,3,5 years in addition to percentage of management fees, percentage of recurring expenses to net assets, investments made in associate companies, payment made to associate companies for their services, and details of holdings, since their operation.

g.        Declare their NAVs and sale/repurchase prices of all schemes updated daily on regular basis on the AMFI website by 8:00 pm and declare NAVs of their close-ended schemes on every Wednesday.

 

Investing in Mutual Funds

Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a day, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and they give no assurance of returns. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.

INVESTOR’S BEHAVIOUR

An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.

INVESTORS OFTEN MAKE BAD INVESTMENT DECISIONS. AND WHAT'S THEIR BIGGEST MISTAKE? NOT USING THE SERVICES OF A PROFESSIONAL FINANCIAL ADVISER

The second half of the 1990s saw the rise of the self-directed investor who was spurred on by the relative ease and growth of Internet trading and an unprecedented bull market. However, many of these investors fell victim to bad investment behavior — such as chasing performance or selling impulsively during short-lived market dips — causing them to act contrary to their best financial interests.

Financial Research Corp., a financial services research and consulting firm based in Boston, studied mutual fund investor habits from 1990 through to the peak of the equity markets in March 2000. Its research provides empirical evidence showing how investors who work without a financial adviser are often their own worst enemy.

Here, we look at some of the biggest errors committed by self-directed investors, what influences their financial misbehavior, and offer solutions for financial professionals to help their clients avoid making bad investment decisions.

Some of the most common errors that are made by individual investors include trading too often and bad timing.

During the 10-year period of the study, unassisted investors realized a lower return on their mutual fund investments than the actual mutual fund returns. The study found that individual investors had consistently higher redemption rates and shorter holding periods than investors who used a financial adviser. In 1996, the average investor had held a long-term mutual fund for 5.5 years and the redemption rate was 17.4%. Four years later, at the height of the boom market, the typical investor held the same long-term mutual fund investment for an average of only 2.9 years and the redemption rate was up to 32.1%. In addition, individual investors compounded the negative effect of trading too often by making poor choices in terms of timing.

The Financial Research study found that many investors purchase funds based on past performance, usually when the funds are at or near their peak, which results in the investors not participating in the greatest gains.

In 42 of the 48 Morning star mutual fund categories studied, higher net flows were received into funds after their best performing quarters. Investors are missing out on superior future potential returns because they consistently prefer to invest in sectors that produced the best returns in the recent past.

Why people do the things they do?

Bad investment behaviour can be attributed to external and internal factors. Externally, investors are influenced by factors they have no control over, such as the three Ms — market, marketers and media.

The market

If the 1980s were kind to investors, then the 1990s could only be described as incredibly generous. Never in the history of the stock market had investors seen returns like the five, 10 and 20 years leading up to the end of the 20th century. Some investors watched from the sidelines, wondering whether they were too late to jump on the bandwagon. Those who did participate regretted not committing more money to the market.

In either case, many investors witnessing this phenomenal period of performance came to a seemingly reasonable conclusion that it is easy to make money in the market. Ultimately, the fear of losing money was replaced with the fear of not making money.

The marketers

Marketers have used a variety of tactics aimed at increasing assets and market share. Much of this effort further perpetuated the notion that it is easy to make money in the market. The technology available to access data about funds has increased significantly. The tools and information available made it easy to constantly trade between funds, fund families and even individual securities. While this information is convenient and technically accurate, it masquerades as knowledge to many investors. Raw data alone, for the majority of investors, can only take them part of the way to making an informed financial decision.

The media

Prior to the 1990s, stock market news (if it made the nightly newscast at all) was covered in a segment that ran significantly shorter than sports. During the 1990s, with the explosion of mutual fund and stock market investors, market news found its way into the headlines.

Headlines may grab the attention of the investor but when it comes to investment products, the goal of the media should be to describe their function and ability to consistently achieve their stated goals, not their temperature or popularity. However, the best that investor publications can do is to offer unqualified advice for the masses. This advice is not often tailored to an investor's personal financial goals, age, investment experience, tolerance for risk or current holdings — all of which are critical factors in determining the suitability of any potential investment.

Some analysts believe that the proliferation of investment information has permanently shifted the volatility characteristics of the market, since investors are more apt to trade to the constant barrage of "critical market information."

Internal factors

Behavioural finance has been receiving much attention in recent years. There is a vast amount of research demonstrating that investors have a strong disposition to make irrational investment decisions that undermine the achievement of long-term goals despite their best intentions to pursue long-term financial goals. Bad investment decisions can result from any of the following:

Finding a solution

The best solution to overcoming bad investment behaviour is for an investor to hook up with a financial professional. financial professionals have the education that better equips them to interpret the flood of available financial data. They are trained to objectively assess an investor's holistic financial profile and risk tolerance level.

As an impartial third party, financial professionals lend an element of discipline to help investors stick with their long-term plan, despite the many tempting but illusory opportunities. There are many real-world solutions that financial professionals can put into practice with their clients that will help avoid the effects of bad investment behaviour.

Investment policy statement:

Clients and their financial advisers should develop an investment-policy statement together. The statement should outline their investment objectives, including return objectives and risk tolerance, and identify investment constraints such as liquidity needs, time horizons, tax considerations and any unique circumstances. These investment goals will in turn guide the investment selection process, discourage random revisions and encourage rational long-term discipline.

Other solutions:

Unlike many individual investors who have full-time jobs, the No. 1 priority of an investment professional is to help investors achieve their financial goals. In addition to developing, implementing, monitoring and adjusting an investor's financial plan, a financial professional adds tremendous value by helping investors make the right decision during periods of uncertainty or increased volatility.

As financial professionals know, good investment decisions come from knowing what not to do as much as knowing what to do.

STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRY

The Indian mutual fund industry is dominated by the Unit Trust of India which has a total corpus of Rs700bn collected from more than 20 million investors. The UTI has many funds/schemes in all categories ie equity, balanced, income etc with some being open-ended and some being closed-ended. The Unit Scheme 1964 commonly referred to as US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs200bn. UTI was floated by financial institutions and is governed by a special act of Parliament. Most of its investors believe that the UTI is government owned and controlled, which, while legally incorrect, is true for all practical purposes.

The second largest category of mutual funds are the ones floated by nationalized banks. Canbank Asset Management floated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones. The aggregate corpus of funds managed by this category of AMCs is about Rs150bn.

The third largest category of mutual funds are the ones floated by the private sector and by foreign asset management companies. The largest of these are Prudential ICICI AMC and Birla Sun Life AMC. The aggregate corpus of assets managed by this category of AMCs is in excess of Rs250bn

Some of the AMCs operating currently are

Name of the AMC

Nature of ownership

Alliance Capital Asset Management (I) Private Limited

Private foreign

Birla Sun Life Asset Management Company Limited

Private Indian

Bank of Baroda Asset Management Company Limited

Banks

Bank of India Asset Management Company Limited

Banks

Canbank Investment Management Services Limited

Banks

Cholamandalam Cazenove Asset Management Company Limited

Private foreign

Dundee Asset Management Company Limited

Private foreign

DSP Merrill Lynch Asset Management Company Limited

Private foreign

Escorts Asset Management Limited

Private Indian

First India Asset Management Limited

Private Indian

GIC Asset Management Company Limited

Institutions

IDBI Investment Management Company Limited

Institutions

Indfund Management Limited

Banks

ING Investment Asset Management Company Private Limited

Private foreign

J M Capital Management Limited

Private Indian

Jardine Fleming (I) Asset Management Limited

Private foreign

Kotak Mahindra Asset Management Company Limited

Private Indian

Kothari Pioneer Asset Management Company Limited

Private Indian

Jeevan Bima Sahayog Asset Management Company Limited

Institutions

Morgan Stanley Asset Management Company Private Limited

Private foreign

Punjab National Bank Asset Management Company Limited

Banks

Reliance Capital Asset Management Company Limited

Private Indian

State Bank of India Funds Management Limited

Banks

Share Khan Securities Pvt. Ltd.  

Private Indian

Sun F and C Asset Management (I) Private Limited

Private foreign

Sundaram Newton Asset Management Company Limited

Private foreign

Tata Asset Management Company Limited

Private Indian

Credit Capital Asset Management Company Limited

Private Indian

Templeton Asset Management (India) Private Limited

Private foreign

Unit Trust of India

Institutions

Zurich Asset Management Company (I) Limited

Private foreign

RECENT TRENDS IN THE INDIAN MUTUAL FUND INDUSTRY

The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by nationalized banks and smaller private sector players.

Causal Factors For The Trend

Many nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to the stock market boom prevailing then. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from the parent organizations. The performance of most of the schemes floated by these funds was not good. Some schemes had offered guaranteed returns and their parent organizations had to bail out these AMCs by paying large amounts of money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few exceptions, they have serious plans of continuing the activity in a major way.

The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quickly realized that the AMC business is a business, which makes money in the long term and requires deep-pocketed support in the intermediate years. Some have sold out to foreign owned companies, some have merged with others and there is general restructuring going on.

The foreign owned companies have deep pockets and have come in here with the expectation of a long haul. They can be credited with introducing many new practices such as new product innovation, sharp improvement in service standards and disclosure, usage of technology, broker education and support etc. In fact, they have forced the industry to upgrade itself and service levels of organizations like UTI have improved dramatically in the last few years in response to the competition provided by these.

The Indian mutual fund industry began with the formation of the Unit Trust of India (UTI) in 1964 by the Government. UTI was formed as a non-profit organisation governed under a special legislation, the Unit Trust of India Act, 1963. It had a monopoly up to 1987 and during this period, UTI launched a series of equity and debt schemes and established itself as a household name with assets under management of Rs.4563 crore and unitholder accounts of slightly under 3 million by mid 1987. UTI's growth continued up to 1996 when the strong entry of private sector players saw its share of the market reducing sharply although UTI continues to be a dominant force in the Indian financial services industry with assets of over Rs. 67,000 crore as of December 31, 1999.

In 1987, the industry saw the entry of public sector mutual funds, i.e. funds promoted by public sector banks and financial institutions, such as SBI, Canara Bank, LIC and IDBI. Predictably they were given the brand of their promoters such as SBI Mutual Fund, Canbank Mutual Fund, LIC Mutual Fund and IDBI Mutual Fund. Other Public sector mutual funds also entered the market but UTI continued to remain the dominant player with a share of 84% in 1991-92 (Source: H. Sadhak: "Mutual Funds in India").

The Government first allowed private sector participation in 1993 and the subsequent entry of a large number of players has made the industry very competitive. The diagram below shows the three segments and a few of the players in each segment. 

Figure 2: Indian Mutual Fund Industry Organization

The private sector players, after an indifferent start in the early years, have made a strong impression especially in the larger cities, with a high quality of fund management, sales and customer service. This sector has dented UTI's dominance resulting in a falling market share towards the end of the last millennium.

As on June 30, 2003

As on Sep 30, 2004

UTI

57.09%

53.60%

Bank Sponsored

3.66%

3.78%

Institutions

4.12%

4.46%

Private Sector 

35.13%

38.16%

Total

100.00%

100.00%

Total (Rs. in crore) 

97953

91811

(Source - AMFI Update Jul-Sep 2004 Vol I Issue XIII)

Figure 3: Asset under Management

Today, the mutual fund industry boasts of a wide spread of schemes catering to all types of investors. The table below gives a good idea of this diversity.

Number of Schemes (As on September 30, 2003)

Open End

Close End

Assured Return

Total

INCOME

85

28

29

142

GROWTH

96

15

-

111

BALANCED

31

4

-

35

LIQUID/MONEY MKT.

28

-

-

28

GILT

24

-

-

24

ELSS

19

52

-

71

TOTAL

283

99

29

411

Source - AMFI Update Jul-Sep 2004 Vol I Issue XIII

Figure 4: Number of Schemes

Although there are many schemes across different investment objectives, Income Schemes account for almost half the corpus of the industry today as shown in the table below.

Assets under Management as on September 30, 2003 (Rs. in crores)

Open End

Close End

Assured Return

Total

INCOME

28090

5533

17736

51359

GROWTH

6708

3675

-

10383

BALANCED

15674

224

-

15898

LIQUID/MONEY MKT.

9113

-

-

9113

GILT

3415

-

-

3415

ELSS

297

1346

-

1643

TOTAL

63297

10778

17736

91811

Source - AMFI Update Jul-Sep 2004 Vol I Issue XIII

Figure 5: Asset Under Management

Although the mutual fund industry has made an impact in the Indian financial services arena, we believe that we have barely scratched the surface. Going ahead, we see mutual funds dominating the financial services landscape and challenging banks in the larger cities and the smaller towns as more people realise the simplicity and convenience of mutual funds.

UTI PERFORMANCE

Steady growth of mutual fund business in India in the four decades from 1964, when UTI was set up is given in the table below

Period (Year)

Aggregate Investment
In Crores of Rs.

Period (Year)

Aggregate Investment
In Crores of Rs.

1964-69

65

1992-93

46988.02

1969-74

172

1993-94

61301.21

1974-79

402

1994-95

75050.21

1979-84

1261

1995-96

81026.52

1986-87

4563.68

1996-97

80539.00

1987-88

6738.81

1997-98

68984.00

1988-89

13455.65

1998-99

63472.00

1989-90

19110.92

1999-00

107966.10

1990-91

23060.45

2000-01

90587.00

1991-92

37480.20

2001-02

94571.00

The downturn in the industry during 1996 to 1998 due to steep slump in the securities market at that time and the fluctuations in recent years after 2000 is due to problems faced by UTI. This is discussed in a later article

[Source: SEBI & AMFI]

Growth of Business Of UTI

Unit trust of India (UTI) is the India's largest Mutual Fund organisation. UTI manages funds over Rs. 58,221 crore as on 30/6/2001 and over 41.80 million investors account under 85 schemes.

UTI was set up in 1964 by an act of parliament and commenced its operation from July 1964, with a view to encouraging saving and investment and participation in the income, profit and gain accruing to corporation from the acquisition, holding, management and disposal of securities.

UTI is a trust without ownership capital and independent Board of trustees. The first scheme was Unit scheme 1964. The contributors of initial capital of Rs. 5 crore for US-64 scheme were RBI, LIC, SBI and some foreign banks. Under the provision of the act, chairman of the board would be appointed by the Government of India. Today it have 54 branch offices, 266 chief representatives and about 67,000 agents. It provide complete range of services to its investors.

UTI has set up associate companies in the field of banking, securities, trading, investor servicing, investment advice and training, meeting investor's varying needs under a common umbrella.

  1. UTI Bank Ltd. (1994)
  2. UTI Securities Exchange Ltd (1994)
  3. UTI Investors Services Ltd (1993)
  4. UTI Institute of Capital Market (1989)
  5. UTI Investment Advisory Services (1988)
  6. UTI Mutual Fund Growth Schemes

According to data published by SEBI, the mutual funds have mobilised a gross amount of Rs.61,241.23 crores during the financial year 1999-2000 as against Rs.22,710.73 crores mobilised during the previous year 1998-1999.

After adjustment of repurchases and redemptions, there was an inflow of funds of Rs.18,969.88 crores in the financial year 1999-2000 as against net outflow of Rs.949.67 crores during the year 1998-99.

 

Further analysis of data shows that there was a net inflow of funds of Rs.15,166.48 crores in case of private sector mutual funds compared to net inflow of Rs.1,452.70 crores during the previous year 1998-1999. While there was a net inflow of Rs.4,548.32 crores in case of UTI as against net outflow of Rs.2,737.53 crores during the previous year, there was a net outflow of Rs.744.92 crores in case of other public sector mutual funds (as against net inflow of Rs.335.16 crores during the previous year).

During the last four years UTI is facing severe crisis due to volatility in the interest rate structures of the money market and falling scale of yields in its investment against committed higher returns to the investors. Government of India has come to the support of UTI and has worked out a package for meeting its commitments and restructuring the same. These are discussed in detail in subsequent articles

Mutual fund flows -- Private sector funds in focus

PRIVATE sector mutual funds appear to still have the hold on the sector that they established in the wake of the US-64 crisis two years ago.

The woes dogging the UTI in US-64 and in many assured schemes, and the indifferent performance of the bank- and institution-sponsored funds created a fertile ground for private sector funds to thrive.

The good performance of such funds as Alliance Capital, Birla Sun Life and Kothari Pioneer (after a bad period in the mid-1990s) over a fairly long period also provided investors with alternatives. The sustained good performance, backed by better disclosures and improved service levels, ensured that private sector funds attracted better investor interest.

The comeback by many funds in the dumps, such as Prudential ICICI, SBI Mutual Fund, Apple Mutual Fund (now part of Birla sun Life) and 20th Century Mutual Fund (now part of Zurich India), also helped improve investor perception about private sector funds. The numbers tell the tale.

Shifting asset base 

As the Table shows, private sector funds now have a higher share in the assets under management in the industry. It was inevitable that the share of the biggest player -- the Unit Trust of India (UTI) -- would decline from the time when it had a monolithic hold on the market. But the US-64 crisis ensured that the decline was much faster.

Between March 1997 and October 2000 -- a period of 40 months -- the UTI's share declined from 82.3 per cent to 64.8 per cent. And this happened at a time when the level of assets under management in the industry rose 47.8 per cent, from Rs 65,510 crore to Rs 96,837 crore. Collectively, the share of private sector funds rose from 4.7 per cent to 27.3 per cent.

The growth rate in fund mobilisation also confirms the picture. The UTI, for all its stress on mobilisation targets, managed a compounded annual growth of 4.3 per cent in 1997-2000. This must be seen in the light of the Rs 12,000 crore raised by its Monthly Income Plans in this period. If, despite this, the assets under management are up by only Rs 9,000 crore, the pressures of repurchase/redemption becomes clear. Since the US-64 corpus has also risen after the crisis-driven redemption in 1998, numbers suggests pressures on other UTI schemes too.

Bank-sponsored funds have actually seen an annual decline of 8.7 per cent in assets under management driven by redemption of a few big schemes, such as BOI Double Square Plus, and the absence of any notable inflows. The slew of income products have ensured that LIC/GIC-sponsored funds have seen a modest, 7 per cent growth.

In sharp contrast, private sector funds (Indian) have recorded compounded annual growth rates of over 60 per cent. Those with an FII linkage (with a foreign institutional investor as a partner) have seen growth rates in excess of 80 per cent. The low base is certainly a factor. But, in absolute terms, private sector funds have close to Rs 26,500 crore under management.

During the period, notwithstanding the sharp decline in the market, the assets under management have increased. In the UTI, on the other hand, the assets under management declined by around Rs 14,000 crore from a high of Rs 76,547 crore in March 2000. Income funds -- especially short-term -- provided an impetus here for the private sector funds.

Big share in inflows 

While in terms of assets under management, the UTI has a sizeable share of over 60 per cent, the trends in fresh inflows provide a clearer idea of the changes underway in terms of investor preferences. From a share of 25 per cent in fresh mobilisation three years ago, private sector funds now account for over 80 per cent of fresh inflows. Between March 1997 and now, these funds collected Rs 92,031 crore -- almost twice the level of funds raised by the UTI (see Table).

 

But the story on the redemption side is equally interesting. Having raised substantial sums of money, the private sector funds also had a larger outgo of Rs 69,265 crore. At the end of the day, the net accretion to the private sector funds was almost three times the levels managed by the UTI, though the latter, as a single fund, continues to be largest fund mobiliser, with a net accretion of Rs 8,451 crore.

Healthy competition 

At the end of the day, the sums mobilised by way of fresh sales and redemption highlight the intense activity in the industry and its rising importance. Aggregate fresh mobilisation between 1997 and now were Rs 1,46,949 crore, and redemption Rs 1,17,500 crore. Add the activity of the FIIs, which have become bigger and bigger traders, and the growing role of institutional investors in the Indian debt and equity markets becomes clearer.

From the point of view of the UTI, the loss in market share and the rising number of players is a good thing. It ensures better balance in the market place. And if the private sector funds collectively grow larger from the present -- a prospect pretty much on the cards -- the disadvantage of being the sole big player may be left behind as far as the UTI is concerned.

This has implications for its investment performance. If the fund management is handled objectively without extraneous pressures, the UTI may be able to effect its buying and selling without as much of an impact cost as earlier. UTI buying and selling has a big impact on prices, which run up or decline in a sharper manner, affecting its performance. A better balance is now in the offing and that is good for mutual funds, including the UTI and investors.

WITH the Sensex plunging from 6,000 levels to 4,500 and bouncing back to cross 6,000 & get 12,000 points, it was certainly a roller-coaster ride for the equity market in 2004. Investors in equity mutual funds may still be dizzy from the ride, but some might say it was worth it, going by the returns that funds delivered in 2004.

True, the performance was not as spectacular as in 2003, when the returns of some of the top-performing funds were over 100 per cent. But equity funds still outperform the indices by a wide margin, which makes them an attractive option for the lay investor.

Beating the broader indices 

That a majority of the funds outperformed the indices is not too surprising. After all, funds have, over the years, found it fairly easy to beat the Sensex and the Nifty by spotting better investment opportunities outside the indices.

The average return recorded by equity funds in 2004 was 23 per cent, beating the Sensex's 12-per-cent return and the Nifty's 9 per cent, by a wide margin. Of the 131 equity funds analysed by Business Line, more than 80 per cent beat the Sensex and over 90 per cent the Nifty.

If this is not a stellar performance in itself, returns against the BSE-200 and the S&P CNX 500, which encompass a broader range of stocks, is noteworthy. More than 70 per cent of the funds outperformed the S&P CNX 500, a tough benchmark that returned 16 per cent during the year.

Top performing funds 

The funds that made it to the top took a more aggressive approach in their investment style, by way of enhancing exposure to mid-cap stocks and taking a more focused approach to sector selection. Relatively new funds, such as UTI Dynamic Equity, HSBC Equity, Sundaram Midcap and Birla Dividend Yield Plus, also raced to the top quartile of the performance list.

But sticking to funds with a consistent, long-term track record such as, HDFC Tax Saver, Franklin Prima and HDFC Top 200, would have also paid off, with these funds also figuring in the top quartile.

Tax-saving funds emerged winners in 2004, with three of the top ten funds falling in this category. On an average, tax saving funds delivered returns of 25 per cent.

Taking into account the savings on the tax outgo as well, these funds would have earned a tidy return on investments. Their superior performance is partly due to their small and relatively stable asset base, which allows the fund manager greater maneuverability compared to other diversified funds that do not have a three-year lock-in period and are, hence, subject to larger inflows and outflows.

Mid-caps boost performance...

A generous allocation to mid-caps was a common trend among most of the diversified equity funds that made it to the top quartile of rankings.

To put things in perspective, the CNX Mid-cap 200 jumped 42 per cent in 2004; the Nifty's 9 per cent pales in comparison. Funds such as Alliance Buy India, HDFC Long Term Advantage (HDFC Tax Plan 2000) and HDFC Tax Saver, which are among the top five, had portfolios packed with mid-cap stocks.

Mid-cap funds, too, turned in strong performances. Franklin Prima ranks first among the mid-cap funds with returns of about 36 per cent — a sound performance, given its large asset base.

Sundaram Mid-Cap and Birla Mid-Cap also delivered returns in excess of 30 per cent. In contrast, the NAVs of their large-cap counterparts, Franklin Bluechip and Sundaram Growth, rose 22 per cent and 26 per cent respectively.

… but are not the only drivers

Mid-cap funds, however, did not make it to the top ten. Sector selection would also have played a role for funds that are not strictly mid-cap but yet managed to outperform the latter.

What is more, a few funds with a fair degree of exposure to large-cap stocks, such as HSBC Equity, Principal Growth Fund and Kotak-30, matched the performance of these mid-cap funds.

The rally in large-caps towards the end of the year led to a surge in the NAVs of these funds, so you would have been better off having both large-caps and mid-cap funds in your core portfolio. Focusing strictly on mid-cap funds, therefore, would not necessarily have given you the best returns and would also have enhanced the risks associated with your investments.

Sector funds, a mixed bag 

With more than one sector participating in the rally, diversified equity funds floated to the top, while the performance of sector funds was mixed. The Reliance Banking Sector Fund was the top-performer, while FMCG, pharmaceutical and IT funds figured in the middle of the rankings.

Funds that focused on oil and petrochemical stocks, such as UTI Petro and JM Basic, were the laggards.

Within sector funds too, there were differences in performance. For instance, although FMCG stocks did not figure in the market rally, PruICICI FMCG Fund delivered a return of 26 per cent, and figured in the top quartile of rankings. Franklin FMCG fund, however, trailed with a return of 11 per cent.

However, with different sectors featuring as themes in the market across periods, the timing of your entry would have been important. For instance, had you invested in UTI Petro Fund six months ago, your investment would have grown more than 35 per cent.

Focus on select sectors 

With investor interest quickly flitting from sector to sector, diversified equity funds were better placed to ride the different themes over the year. A focused approach to sector selection also helped in the cases of SBI Magnum Tax Gain, Alliance Buy India and SBI Magnum Contra.

Funds such as Alliance Buy India took concentrated exposures to mid-cap stocks in the retailing and pharmaceutical sectors early on, which earned it a 50 per cent return. SBI Magnum Contra, a sector fund that focuses on a few sectors that are out of favour in a particular period, benefited from its large holdings in the construction and cement sectors.

Concentrated exposures to sectors, however, increase the risk profile of these funds, as the returns depend to a large extent on the performance of a few stocks and sectors.

The laggards 

The case for active investing was made yet again in 2004, with index funds making up the bulk of the laggards list; their returns hovering at 6-9 per cent. Also, indices in India are poorly constructed, with weights concentrated in select sectors and stocks.

This is why most funds find it easy to beat indices by staying away from stocks and sectors that are out of favour in the market, but have a high weightage in the indices.

Other funds that made up the bottom quartile include JM Basic, Bonanza Exclusive Growth, UTI Petro, PruICICI Growth and LICMF Tax Plan.

Overall, equity funds have weathered the different moods in the market well. Their ability to withstand corrections and rebound quickly from lower levels strengthens the argument for always having equity funds as a part of your investment portfolio.

Sticking to diversified equity funds with a good track record, such as HDFC Equity, HDFC Top200 and Franklin Prima, would stand you in good stead, as it did in 2004.

IN THE past couple of months, a spate of mutual fund IPOs (initial public offerings) mopped up more than Rs 1,000 crore from the market. The overwhelming investor response to these IPOs is, in a way, indicative of the faith in the fund managers' ability to outperform the market substantially (as they did in 2003), no matter how stormy the conditions in the bourses.

 

As it happens, the confidence was not misplaced. An analysis of mutual fund performance in the July-September quarter reveals that funds have, indeed, performed well, even in a relatively difficult market.

 

The benchmark indices — the Nifty and the Sensex — gained about 14 per cent and 15 per cent respectively over the quarter, while equity funds, on an average, recorded returns of 16-17 per cent — nothing extraordinary compared to the performance in 2003, but good enough considering the rather sedate pace of the market during

 this period. Of the 177 equity funds analysed by Business Line, 133 beat the Nifty, while 114 outpaced the Sensex.

Sector funds lose steam 

In the April-June quarter, a good number of sector funds topped the list, particularly those focused on the technology and pharmaceutical sectors. But, this time, sector funds were missing from the top ten, giving way to diversified equity funds.

With the rally witnessed across more than one sector, diversified equity funds were better placed to cash in on such themes as engineering, chemicals, electrical equipment and pharmaceuticals. These sectors figured prominently in the portfolios of the top-performing funds.

Select sector and theme funds, however, did record a good performance, with UTI Basic, SBI Contra, Prudential ICICI Tech Plan and UTI Pharma Fund generating more than 20 per cent returns. But, even within a sector, funds turned in varying performances.

For instance, while UTI Pharma managed 21 per cent, SBI Pharma turned in about 9 per cent, reinforcing the importance of stock selection. Banking sector funds, of course, lagged the list, with bank stocks being largely out of favour in recent months.

Mid-cap focus pays off 

A bias towards mid-caps certainly appears to have aided funds' performance. In the July-September quarter, the CNX Mid-Cap 200 gained a whopping 29 per cent. Mid-cap funds such as Sundaram Select Mid-Cap and Taurus Discovery made it to the top ten.

Mid-cap funds were also ahead of their large-cap counterparts. For instance, Sundaram Select Mid-cap generated a 30 per cent return, while Sundaram Growth turned in 17 per cent. Again, the NAV of Franklin Prima appreciated about 21 per cent. Franklin Bluechip registered just 12 per cent during the quarter underperforming the Sensex — perhaps for the first time.

Large-cap funds such as HDFC Equity, HSBC Equity and Franklin Bluechip have swelling asset bases at more than Rs 1,000 crore, leaving them little flexibility to invest in mid-cap and small-cap stocks. With hardly any action in the large-caps this quarter, these funds turned in more modest performances than mid-cap-focused funds.

Tax-saving funds race ahead 

In contrast, tax-saving funds, with their smaller asset bases, were able to capitalise on the mid-cap rally. Tax-saving funds turned in a strong performance during the quarter, with an average return of 19 per cent.

Five of the top ten funds were tax-saving funds. Funds such as HDFC Tax Plan 2000 and Prudential ICICI Tax Plan were ahead of the pack with their strong mid-cap bias.

Broader indices, tough to beat 

Despite the focus on mid- and small-cap stocks, only 45 per cent of the funds beat the 17 per cent return of the S&P CNX 500. This considerably lags the performance in the April-June quarter, when more than 75 per cent of the funds beat the index.

While mid-cap funds beat the CNX 500 with ease, they found outperforming the CNX Mid-cap 200 — a more stringent benchmark — an uphill task. Mid-cap funds such as Franklin Prima and Birla Mid-Cap trailed the CNX Mid-cap considerably.

Within the basket of mid-cap funds, there were divergent performances. Funds that kept pace with the index, such as Sundaram Select Mid-cap, had large holdings in engineering and chemicals sectors. Mid-cap stocks belonging to these sectors sprinted during the quarter.

Franklin Prima and Birla Mid-cap, however, lacked a strong presence in these sectors, which could explain their lagging performance. This, again, emphasises the importance of investing in the right sectors and stocks to stay ahead of the rest.

Large-cap focus drags performance 

Funds heavily invested in large-caps, such as UTI MasterPlus, GIC D'MAT and SBI Magnum Growth Fund, found themselves at the bottom of the list. Almost all index funds were relegated to the last quartile of the fund rankings.

Funds such as LIC MF Index Fund had a substantial tracking error, turning in just about eight per cent. Other index funds did generate returns that fell only slightly short of the Nifty and the Sensex. Investing in actively managed funds is still a better option than investing in index funds.

Diversified equity funds that were fairly heavily invested in banking stocks were also dragged to the bottom of the pile. These include funds such as Principal Equity Fund, Franklin India Bluechip, Alliance Frontline Equity and banking sector stocks such as Reliance Banking Fund and UTI Banking Fund.

Other funds that trailed the indices include Birla Dividend Yield Plus and the recently launched DSP ML T.I.G.E.R Fund, which turned in 12 per cent in its debut quarter.

Leading funds such as HDFC Equity and HSBC Equity formed the middle rung in the ranking list, with returns of about 19 per cent. These funds have, however, been credited with consistency in performance, particularly HDFC Equity, which has a longer track record.

Strategies such as taking concentrated exposures to stocks or sectors may have helped performances in this quarter, but may not hold good in the long term. A bias towards mid-caps during a mid-cap rally did not necessarily propel a fund to the top of the list.

The performance of these funds would have to be viewed against their track record and evaluated over a longer period, before fresh investments are contemplated. 

PROBLEMS

  1. Problem of low retention and consequently low profitability, which is one of the problems plaguing the business.
  2. Equity did not find favor with investors since the market was lack-luster and performances of funds, barring a few, were quite disappointing for investors.
  3. The industry did see spectacular growth in assets, particularly among the private sector players, on the back of the continuing debt bull run.
  4. Unfair trade allocations: Another major issue haunting mutual funds relates to allocation of trades. Industry sources say that most mutual funds do not have adequate systems and processes to ensure “fair” trade allocations.

MEASURES TO OVERCOME THESE PROBLEMS

  1. Mutual funds are required to maintain separate records for portfolio transactions relating to each fund scheme. So that they can have adequate systems and process to ensure “fair” trade allocations.
  2. Retention of Mutual funds is to be increased. So that the MFs business can grow with a rapid pace.
  3. The investors are to be motivated to invest in Equity Funds.
  4. More transparency should be exercised by the fund houses.

In India, mutual funds have a lot of potential to grow. Mutual funds companies have to create and market innovative products and frame distinct marketing strategies. Product innovation will be one of the key determinants of success. The mutual fund industry has to bring many innovative concepts such as high yield bond funds, principal protected funds, long short funds, arbitrate funds, dynamic funds, precious metal funds, and so on. The penetration of mutual funds can be increased through investor’s education, providing investor oriented value-added service, and innovative distribution channels.

Mutual funds have failed during the bearish market conditions. To sell successfully during the bear market, there is a need to educate investors about risk-adjusted return and total portfolio return to enable them to take informed decision. Mutual funds need to develop a wide distribution network to increase its reach and tap investments from all corners and segments. Increased use of Internet and development of alternative channels such as financial advisors can play a vital role increasing the penetration of mutual funds. Mutual funds have come a long way, but a lot more can be done.

BIBLIOGRAPHY

www.moneycontrol .com

www.valueresearch.com

www.nseindia.com

 

www.amfiindia.com

www.sharekhan.com

www.uti.com

www.sebi.com

Times Of India

Outlook MONEY : The Layman’s Guide To Mutual Fund

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